S&P 500 Got Its Bounce - Now Comes The Hard Part

Stocks rallied on Monday, as expected. A rally seemed inevitable, given how elevated implied volatility had become and how negative gamma and delta positioning were, as I pointed out over the weekend. As I said on Sunday, if stocks hadn’t rallied, it would have been a really bad sign.

Does the rally last? Is the sell-off in the technology sector over? It’s hard to say. The Nasdaq 100 was down well over 10% at its low, while the SMH had fallen more than 30%. So, while Monday’s rally was impressive, I’m not sure what it tells us about the longer-term picture.

In the end, negative gamma positioning likely amplified Monday’s rally. In other words, much of Monday’s rally may have been driven by mechanical hedging flows rather than a meaningful shift in the market’s underlying fundamentals.

Liquidity flows remain negative and are likely to stay that way for another couple of weeks. We also have Treasury bill settlements today, so nothing has really changed on that front.

The one potentially bullish factor for the market right now is that the VIX 1-Day is sitting around 16. That leaves room for it to fall back toward 10 or 11 at today’s open, potentially boosting stocks as short-dated option premiums decline and hedges are adjusted. However, I would expect that boost to be smaller, probably less than 1%.

Finally, Nvidia could be in for a rough period, and I seriously don’t know where the market really goes if it has lost Nvidia.

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